Question

Hubrey Home Inc. is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset falls into Class 10 for tax purposes (CCA rate of 30% per year), and at the end of the three years can be sold for a salvage value equal to its UCC. The project is estimated to generate $2,550,000 in annual sales, with costs of $808,000. If the tax rate is 35%, what is the OCF for each year of this project? (Enter the answers in dollars. Do not round your intermediate calculations. Round the final answers to 2 decimal places. Omit $ sign in your response.)

OCF1 [ ]$

OCF2 [ . ]$

OCF3 [. ] $

Answer #1

**Answer
:**

First, Calculate the depreciation for three years as follows :

Year 1 = ( 2,900,000 * 30% ) * 50% = 435,000

Year 2 = ( 2,900,000 - 435,000 ) * 30% = 739,500

Year 3 = ( 2,465,000 - 739,500 ) * 30% = 517,650

Now,

Calculation of Operating cash flow for each year as follows :

Particulars |
Year
1 |
Year
2 |
Year
3 |

Sales | 2,550,000 | 2,550,000 | 2,550,000 |

Less : Costs | 808,000 | 808,000 | 808,000 |

Less : Depreciation | 435,000 | 739,500 | 517,650 |

Profit before tax | 1,307,000 | 1,002,500 | 1,224,350 |

Less : Tax @ 35% | 457,450 | 350,875 | 428,522.50 |

Profit after tax | 849,550 | 651,625 | 795,827.50 |

Add : Depreciation | 435,000 | 739,500 | 517,650 |

Operating cash flows |
1,284,550 |
1,391,125 |
1,313,477.50 |

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